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2018 Banking Industry Outlook

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There’s considerable opportunity for banks over the coming year, but sustainable growth will likely depend on navigating six dominant themes.

The banking industry entered 2017 with an air of cautious optimism amid clouds of policy uncertainty. Today, the clouds have cleared a bit. For banks around the world, 2018 could be a pivotal year for accelerating the transformation into more strategically minded, digitally connected, and operationally agile institutions better equipped to maintain market leadership in a rapidly evolving ecosystem.

But this year also promises multiple challenges, including complex and diverging regulations, legacy systems, disruptive models and technologies, new competitors, and an often restive customer base with ever-higher expectations. For banks’ five business lines—retail banking, corporate banking, capital markets, payments, and wealth management—six broad themes could be especially critical for sustainable long-term growth in the coming 12 to 18 months:

Customercentricity. True customercentricity has long been a Holy Grail for banks, which have made notable strides in moving away from sales-dominant cultures. But clients’ expectations are evolving at a much faster pace, thanks in particular to the superior experiences they enjoy with other industries. Being agile in experience delivery is as important today as targeting the right markets and right customer segments with the right solutions.

Fintechs and big techs. Banks can learn from fintech firms, which have set a new benchmark in exceeding customer expectations in financial services. Fintechs have redefined the direction of innovation in banking. However, incumbent financial institutions are likely to maintain their dominance given their scale of operations, regulatory barriers to entry, and customers’ reluctance to switch. That doesn’t mean that banks should rest on their market laurels, however—just the opposite. Instead, they can explore ways to enhance the customer experience. Banks could replicate what fintechs are doing, collaborate with them, or acquire them. Moreover, banks can take an expansive view of competitive benchmarking to include the best-in-class fintechs and big tech companies.

Regulatory recalibration. Banks, at least in the United States, are sensing some stabilization in today’s new rule-making, but expectations of a major regulatory pullback may be overstated. In addition, regulatory divergence among national regulators remains a major challenge. Regulatory and political developments in Europe, such as the Markets in Financial Instruments Directive II, Payment Services Directive 2, and Brexit, can have spillover effects for global banks. Banks will need to integrate regulatory compliance with strategic priorities and apply standards of due care in managing their businesses.

Technology management. As much as banks may wish they could, discarding legacy systems is not an option. Modernizing the core appears to be a priority on par with investing in a portfolio of new technologies such as blockchain and robotics and cognitive automation. There is a lot to be done, and it is not going to be easy. Banks can aim to strike a balance between retaining competitively differentiating activities in-house and externalizing others. In 2018, technology units within banks will likely begin transforming themselves from managing platforms to orchestrating technology and information flows across all the stakeholders.

Mitigating cyber risk. As threats become more sophisticated and institutions grow more interconnected, funding for cybersecurity continues to increase. There is also greater cooperation among banks, counterparties, and regulators, including sharing of information and best practices. But more needs to be done. Cyber risk is now a factor in every aspect of change and transformation. Accordingly, it’s important to involve cybersecurity specialists in a number of business initiatives, including, of course, the adoption of new technologies.

Reimagining the workforce. Automation is changing the nature of work in banking, and the future workforce is going to be more diverse than it is today, including employees who work off the balance sheet—contractors and freelancers—and robots working alongside human employees. Institutions must brace themselves to manage such diversity. As banks attract new talent with technical expertise, existing employees will have to learn new skills to aid the transformation into a digital organization. Banks can also consider fostering a collaborative and inclusive culture that offers a more integrated employee experience.

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Over the course of 2018, banks that can address these emerging challenges and opportunities to effectively balance long-term goals with short-term performance pressures could be amply rewarded. The complete 2018 Banking Industry Outlook offers more detail on these themes and how they are expected to influence banks’ core business lines throughout the year.

2018 Banking Industry Outlook

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